Royal Bank of Scotland warns of 'bumps in road' despite profits bounce

The boss of Royal Bank of Scotland warned of ‘bumps in the road’ ahead as it stunned the market with a dramatic bounce in profits.

The lender rushed out its results a week early because they were much better than expected.

Profits in the first half of the year almost doubled to £2.7billion, as the improving economy led to a sharp fall in bad loans. But chief executive Ross McEwan braced investors for ‘significant conduct and litigation issues that will hit our profits in the months and years to come’.

Perhaps its biggest concern is the potentially huge litigation costs in the US for mis-selling toxic bundles of mortgage debt before the financial crisis. This was one of the reasons why it was forced to make an extra £3.8billion provision in February.

Several other banks including JP Morgan and Bank of America have already reached multi billion pound settlements with US authorities for duping investors into buying risky investments called mortgage backed securities. RBS is also among a string of banks across the world braced for potentially huge fines for manipulating the £3 trillion a day foreign exchange market.

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So far it has suspended three employees. Regulators have warned the scandal could be even bigger than Libor, for which RBS has been fined more than £700million by regulators in the US, the UK and the EU. Yesterday the bank (up 35.4p to 364.2p) revealed it had set aside another £250million for mis-selling PPI and interest rate swaps, taking its total bills for the two scandals to £3.25billion and £1.35billion respectively.

The surge in profits was largely due to a £1.8bn fall in losses from bad loans, including those in the ‘bad bank’ set up by RBS at the start of the year.

Lord Thurso, a member of the Treasury Select Committee, said: ‘Mr McEwan is very wise to urge caution. It’s quite clear that there may be more as yet undiscovered problems that all have their root in the pre-crash days.’

Yesterday Virgin Money completed its 2012 purchase of the ‘good bank’ of stricken lender Northern Rock, by repaying £154.5million it borrowed from the Government to finance the deal.